Does the Insurer’s Duty to Defend Extend to an Award of Attorneys’ Fees Under a Fee Shifting Provision When the Insured is the Non-Prevailing Party?
In construction defect actions and construction contract fee disputes, the general contract between the general contractor and the owner and the subcontracts between the general contractor and its subcontractors often contain fee shifting provisions which provide that the prevailing party in any litigation shall be entitled to recover its attorneys’ fees. Construction defect actions brought by a homeowner typically consist of negligence claims based on the independent duty owed by general contractors and subcontractors to homeowners to build a home in a non-negligent, workmanlike manner which claims should be covered under a commercial general liability (“CGL”) insurance policy. In many residential construction defect actions, there are also breach of contract claims which are usually not covered under a CGL insurance policy. Generally, the construction professional’s insurance carriers recognize their duty to defend all of the claims based on the assertion of the negligence claims but reserve their right to deny any duty to indemnify the insured for any damages claim ultimately awarded against the construction professional after entry of final judgment. Crossclaims and third-party claims between construction professionals often raise the same coverage issues between the insurer and the insured.
Some construction defect actions arise in response to a construction professional’s affirmative claim to recover monies owed for labor performed and materials supplied at a construction project. In addition, the defending construction professionals sometime assert counterclaims sounding in both contract and tort against the homeowner in some construction defect actions. General liability policies or homeowner’s policies maintained by homeowners may also cover tort claims but exclude contract claims. In this scenario, the homeowner’s insurance carriers may also recognize their duty to defend all of the counterclaims because of its duty to defend tort claims but reserve their right to deny any duty to indemnify the homeowner for any damages claim ultimately awarded against a homeowner after entry of final judgment.
The insured’s potential exposure to pay the other side’s attorneys’ fees under a fee shifting provision is often a significant factor in assessing settlement options compared to the risks of going to trial. Under the “American Rule” as codified by C.R.C.P. 54(d) and C.R.S. §§ 13–16–103 and 13–16–104, attorney fees are not normally considered recoverable costs by a prevailing party absent a fee shifting provision. As a result, many attorneys incorrectly assume that any award of attorneys’ fees against an insured under a fee shifting provision would be considered “damages” covered only by an insurer’s duty to indemnify rather than “costs” covered by an insurer’s duty to defend.
In fact, any post-trial award against the insured for attorneys’ fees pursuant to a fee shifting provision may be considered “costs” covered under the insured’s acknowledged duty to defend rather than “damages” covered under the denied duty to indemnify. In other words, if an insured goes to trial and loses on its affirmative claims, or claims, counterclaims, crossclaims or third-party claims asserted against the insured, the insurance company may be obligated to cover the attorneys’ fees under its duty to defend thereby completely reducing or eliminating any downside risk to the client (See, e.g., Farmers Reservoir & Irrigation Co. v. City of Golden, 113 P.3d 119, 134 (Colo. 2005); cf. Mr. Hawley Ins. Co. v. Casson Duncan Constr., Inc., 409 P.3d 619, 622 (Colo. App. 2016)(“the obligation to pay costs is linked not to coverage, but to the defense of the case”).
Attorneys representing an insured in a construction defect action or a contract fee dispute should consider these cases in evaluating their client’s exposure in the face of a fee shifting provision when an insurance carrier is providing a defense under a reservation of rights but denying any duty to indemnify the insured for any damage award ultimately entered against the client. Depending on the procedural posture of the construction defect action, the question arises as to whether or not an award of attorney’s fees is a covered cost under an insurance carrier’s duty to defend a claim.
If the insured is the non-prevailing party on an affirmative claim not covered by an insurance carrier’s duty to defend or the duty to indemnify, then the attorney fees may not be covered under the insured’s duty to defend because an insurer never has a duty to prosecute an affirmative claim. If the insured is considered the non-prevailing party on a claim, counterclaim, crossclaim or third-party claim covered by the insurance carrier’s duty to defend subject to a reservation of rights, then the attorneys’ fees should be covered under an insurer’s duty to defend.
Litigation tasks such as taking and defending depositions and preparing mandatory disclosures contained in an attorney fee award against a non-prevailing party often apply equally to prosecuting affirmative claims and defending claims. In such circumstances, an attorney representing the insured should demand that the insurer cover any task which would have been necessary to defend a claim even if it was also related to prosecuting an affirmative claim. At a minimum, an attorney representing an insured under such circumstances should insist upon an equitable split between the insured and the insurer of fees benefiting both the prosecution of affirmative claims and the defense of claims, crossclaims, counterclaims, or third-party claims.
For assistance in bringing or defending against construction defect claims or insurance coverage questions contact Dave Lenyo (, 970-925-1936, ext. 206).